Hello and welcome to the Fluent, Inc. Second Quarter 2021 Earnings Results Call. My name is Laura, and I will be coordinating your call today. I would now hand you over to your host to begin, Ryan McCarthy. Ryan, please go ahead.

Good afternoon and welcome. Thank you for joining us to discuss our second quarter 2021 earnings results. Joining me on today's call are Fluent's Interim CEO, Don Patrick; and CFO, Alex Mandel. Our call will begin with comments from Don Patrick and Alex Mandel, followed by a question-and-answer session. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit our Investor Relations page on our website, www.fluentco.com. Before we begin, I would like to advise listeners that certain information discussed by management during this conference call will contain forward-looking statements covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements made during this call speak only as of the date hereof. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These statements may be identified by words such as expects, plans, projects, could, will, may, anticipates, believes, should, intend, estimates and other words of similar meaning. The company undertakes no obligation to update the information provided on this call. For a discussion of the risks and uncertainties associated with Fluent's business, we encourage you to review the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During the call, we will also present certain non-GAAP financial information relating to media margin, adjusted EBITDA and adjusted net income. Management evaluates the financial performance of our business on a variety of indicators, including media margin, adjusted EBITDA and adjusted net income. Definitions of these metrics and reconciliations to the most directly comparable GAAP financial measure are provided in the earnings press release issued earlier today. With that, I'm pleased to introduce Fluent's Interim CEO, Don Patrick.

Thank you, Ryan, and good afternoon. Thanks to everyone for joining us today. Joining me today is Ryan Schulke, now our Chief Strategy Officer, Chairman of the Board and Company Founder, as we recently transitioned our roles. The key motivator to our recent executive changes is to position our founding team fully on the frontlines of our business in order to harness their deep expertise and better align the executive team to drive our strategic agenda forward. On prior calls, Ryan has articulated Fluent's three strategic growth pillars: our media footprint, our performance marketplace and our platform. And how they best position us in this very dynamic and rapidly evolving marketplace in which Fluent operates. The success we reflected upon in 2020 and beyond, in terms of onboarding and scaling larger, more sophisticated clients at our performance marketplace, while increasing and sustaining improved monetization on our platform, motivated us to further redesign our media footprint in the form of our traffic quality initiatives. We see higher quality as the road to sustainable long-term growth and are resolute in our belief that it will better position us as an industry leader. Even though through these more strategic media and client investments, we will knowingly forego some near-term margin. In our earnings release today, our numbers for Q2 reflect revenue being up 3% year-over-year, media margin being down 19% year-over-year, at 27% of revenue, reflecting investments in the quarter, which I'll discuss further, and adjusted EBITDA representing 3% of revenue. We see our strategic North Star as capitalizing on the demand for higher quality digital experiences for consumers, and more effective and sustainable solutions for marketers. With quality as a foundational principle, we've been accelerating our strategic transition of our business, and our unwavering commitment to significant investment in quality across our performance marketplace. In practice, this means we're continuing to enhance our media properties and consumer experience in order to create more meaningful, enduring, and high-value connections for consumers with our top-tier clients and brands. The end goal of these efforts is to enhance Fluent's brand equity with our clients and in the marketplace. By meeting and exceeding client ROI goals, while building enterprise value for our stakeholders, and we believe we're already benefiting from the significant progress in our journey. So our current operating focus continues to be anchored around our traffic quality initiatives. As Ryan has spoken to in the latter part of 2020 and in Q1 of this year, we cut back significantly on our affiliate traffic sources that did not meet our quality requirements. While we continually monitor traffic quality, with the steeper cuts largely in the rearview mirror, our focus has been on growing traffic volumes with existing partners, who share our commitment to quality while testing new partners, strategies, and media channels. Relative to our traffic volumes in early April, we are currently trending up 25%, underpinned by the rebound in our volumes driven by the accelerated expansion of traffic sourced from the big digital media platforms including Facebook, Google, Snap, and TikTok. While on the last earnings call, we indicated an expectation of Q2 revenue would decline 11% to 13% year-over-year. During the quarter we found opportunities to more rapidly drive platform spend ahead of our prior expectations. However, this spend, along with investing in testing affiliate buying strategies, produced considerably lower margins than our more established side of our traffic mix. As is typical in our business, a test-and-learn approach to validating scale then optimizing into profitability has positioned us to leverage our media investments with incremental margin as we move into the second half of the year. On the last two calls, we've indicated that our traffic quality initiatives would take a couple of quarters to reestablish prior trend levels and we continue to maintain that outlook. We anticipate year-over-year top-line growth in each of the third and fourth quarters, albeit with profitability concessions as we invest to test and learn with new affiliate partners and continue to source more media from the digital platforms. However, we do anticipate sequential improvements in profitability relative to Q2. Overall, we see the timelines in the arc of our traffic quality initiative as directionally similar to the industry precedents set by leading public companies that proceeded to rebuild volume, profitability, and substantial enterprise value. Certain strategically relevant yet smaller business units performed notably well in Q2. Our jobs business was up two times year-over-year as the proliferation of vaccine spurred recruitment spend, and our AdParlor agency business enjoyed similar growth. Our content site branded The Smart Wallet along with our programmatic data sales business were both up three times year-over-year. We foresee continued growth from these businesses in the second half of the year. We also expanded our international media footprint by launching in Canada, where we've already validated market viability and are working to scale. We remain optimistic about our growth prospects here and are targeting further international expansion in the back half of the year. Regarding our second growth pillar or platform, we've mentioned for several quarters that monetization has increased significantly over the course of 2020, approximately doubling from Q1 to Q4. I'm glad to share that our monetization remains robust, which we believe will continue through the second half. These results validate the substantial return on investments we made in our technology and analytics over the last couple of years. Another aspect of our platform where we continue to invest is the expansion of our CRM efforts, through which we've increased the lifetime value of consumers on our properties by reengaging them beyond what we call day-zero for their initial visit to our websites. A key initiative on this front has been our investment in the Winopoly business, which provides live agent telephony activations for Fluent leads and has grown considerably beyond initial expectations. This platform enables us to take a consumer from a digital experience to a live call interaction to connect them to higher consideration, higher value transactions with top-tier brands in senior insurance, financial services, and home services. Regarding our third pillar, our performance marketplace, we continue to see world-class brands leading in with strong demand that will exceed their available supply. These critical invaluable relationships enable our efforts not only to redefine our media footprint but also to drive the establishment of new media partnerships. In turn, this will drive margin expansion and greater predictability of earnings in our longer-term growth opportunities. In sum, our growth strategy remains well-grounded and intact, we are well positioned in our dynamic marketplace, and our investment in traffic quality initiative is on track. As Ryan has previously noted, our approach to running the business is grounded in timeless principles with a sustainable growth strategy, leading-edge operating protocols, and best-in-class code of conduct. Our recent management shift further concentrates the operating focus of our organization to accelerate our strategic roadmap and growth agenda, leveraging the industry-renowned talents of our founders, who are leading innovators and operators. Thank you for your support, as we continue to move full speed ahead on our mission. And with that, I'll turn it over to Alex to cover our financial results.

Thanks, Don, and good afternoon. As Don spoke to, our team led by Fluent's founding executives has been positioned on the front lines driving a strategic transition of our business, the foundation of which is a focus on quality across Fluent's performance marketplace. At the time of our last earnings call in early May, we were coming off the lowest month of consumer traffic volume this year, having cut back significantly in the preceding couple of quarters on traffic sources that didn't meet our requirements. At the time of that call, we were already hard at work, rebuilding our supply base with sustainable sources of traffic that meet our protocols, and anticipated a reasonable timeframe would be needed to build our volumes back up. In that context, we anticipated Q2 revenue would be down year-over-year. Through the course of Q2, as Don mentioned, our team found opportunities to deploy media spend beyond what we had anticipated to accelerate our test-and-learn approach to supply discovery. This incremental volume was sourced primarily from the major digital media platforms, and we understood it would carry a lower margin profile, but viewed this discovery as aligned with our rebuild efforts. As such, our revenue for the quarter of $73.4 million represented the growth of 3% year-over-year, exceeding prior guidance, while our media margin came in at 27.4% of revenue, reflecting the effect of lower margin media spend to accelerate our supply discovery. In deploying this additional spend in Q2, we found success with new promotional campaigns that expanded our addressable audience, and new means of cross-promoting our programs across Fluent's own media properties. We've spoken over the last few quarters about testing enhancements to the design of our rewards programs, which had elevated the costs of fulfilling rewards earned by consumers. For the outlook, we indicated on our last earnings call that fulfillment expense did moderate sequentially in Q2, benefiting our non-media cost of revenue. Our operating expenses on a GAAP basis for Q2, comprising sales and marketing, product development, and G&A, grew in aggregate by $2 million or 12% year-over-year to $18 million. This increase primarily derives from the growth of the Winopoly business, which was nascent in Q2 of last year. Adjusted EBITDA of $1.9 million in the quarter represented 2.5% of revenue, generally following the trend line of our media margin in the quarter. Interest expense declined by $900,000 year-over-year benefiting from the lower cost of debt under our new credit facility. In Q2, we continued to be a non-cash federal taxpayer due to the pre-tax loss. We reported a GAAP net loss of $5.2 million in the quarter and adjusted net loss, a non-GAAP measure of $1.9 million. Our non-GAAP metrics are reconciled in today's earnings release and our 10-Q and 10-K filings. Turning to the balance sheet, we ended the quarter with $26.6 million of cash and restricted cash. Working capital, defined as current assets minus current liabilities, was $44.4 million at the end of the quarter, up $13.9 million year-over-year. Total gross debt at June 30 of $50 million included the funded term loan balance of $48.75 million and the remaining $1.25 million note payable in connection with a 2019 AdParlor acquisition, which was subsequently funded on July 1. As we continue on our journey to strategically invest into quality across our business to attract and retain the consumers, clients, and brands that we believe represent the future of our sustainable growth strategy, we've recognized that our financial results reflect this transition. Our outlook for the balance of the year reflects continued progress operationally and financially. We are motivated to achieve results that will convey meaningful value to the multitude of Fluent stakeholders. We're glad to field questions at this time.

Thank you. Our first question comes from Michael Graham from Canaccord. Michael, your line is now open.

Great, thank you for taking the questions, guys. And congrats on the progress with traffic growth. It's definitely good to see that expanding after expecting a decline from the guidance previously. So that's great. And that's really kind of the cornerstone of my question. You mentioned that you found some sort of rich veins in some of the bigger social media platforms. Do you think that that's sort of going to be the profile of your media mix going forward? Like how far afield from those platforms are you going to be taking your testing? And can you just talk about any signs that you have that the quality of that traffic is actually better than what you had been getting before?

Hi, Michael. Thanks for the question. I'll put the traffic quality initiative a little bit in a framework, and then we'll kind of answer specific questions. So we kind of break it into three phases. The first one was the cutbacks, right, of getting rid of traffic that was lower quality or with partners that wouldn't meet our quality. The second sort of building back, which was primarily the easier part, was going with current partners that we have, or current platforms or strategies that we currently can lean more heavily into. And that's pretty much what we did in Q2 around the digital platforms. We've been on these platforms for a long time. We've been buying there, but we really accelerated our testing and learning, and how those properties, the creative and the offers would work across those. So specifically, we did lean heavily into that, as we did lean heavily into current affiliate partners that we have. That second piece of that building back is, obviously, new partners and new strategies, and new channels. We've also been doing that heavily in Q2, but those take a little bit longer timeframe and a little bit longer of a cycle in terms of testing and learning. So as we kind of look at the digital platforms, it's critical to us. The monetization across those, you can imagine, is more variable than you would see in the affiliates or with our strategic partners, because of the CPMs and how they move around. So when you see the CPMs go down and it's attractive, we lean heavily into it. When we see some of the seasonality or some of the things that come up on some of the platforms like we saw on Facebook with some of the iOS changes, you pull back and go into the affiliate side a little bit more. So did that answer your question, Michael?

It does. And, yeah, thank you for that. And the follow-on was just, what signs do you have that the traffic is higher quality?

Yeah, our main metric is really around the monetization and monetization by that traffic source towards the audience and towards the brand. So we sort of track those at a very, very granular level. We discussed in aggregate that the monetization has more than doubled over a year and has held steady. And as Ryan has indicated, some of the traffic sources that we took off the board because of quality, obviously, had a little bit heavier monetization. So the fact that we had that monetization steady from a portfolio perspective is positive for us.

Okay, and thank you for that. And then, maybe just last follow-up and I'll go back in the queue, is just can you sort of refresh us on how to think about the roadmap from here with respect to timing, like, you're going into that third phase of sort of the rebuilding where you're going to be leaning into new partners and new sources now, like any thoughts on how long that takes and is there any sort of updated view on when you think the traffic quality initiative is sort of done and you're back to business more or less as normal?

Oh, great lead-in, Michael, because we've been really pushing internally here that the traffic quality initiatives is part of our DNA going forward and will never go away, right? But the key part is that third phase, which will be more around how you optimize and how you accelerate and how you strengthen the quality on an everyday basis. Specifically, in phase two, we have leaned into the existing partners and platforms. The new partners and new channels that we've been going after, we've seen some nice acceleration. We've also seen some elongated sales cycles. So admittedly, there is some variability here as we establish those new relationships and we raise the bar on our current partners, but we look at it from an overall perspective as we do see sequential growth in Q3 and Q4 while improving our margin, which we believe will continue to accelerate that phase.

Okay. Thanks so much.

Our next question comes from Jim Goss from Barrington. Jim, please go ahead.

Thank you. This first question might probably reflect or relate to the last question that you mentioned that there were you had sourced some new business from these large digital providers, but at lower margins. And I'm wondering, what level of margin that was at and does that reflect the benefits you've got from the higher quality traffic? And was the margin - were the margins lower, because they held the upper hand in those negotiations? Or was there some other reason? And I've got a couple of others.

Hi, Jim, thanks for the question. The bottom line, I would put in one framework here is that obviously, we do not have a baseline of profitability that we have to hit. Regardless of the sources and how much we're investing, there's a profitability threshold that we make across all of our media sources. Did we - as we lean in and we try test some things, we know that we might lose money in the - we might break even at the beginning, but that has to scale and scale aggressively over time and we monitor that by source and by traffic. So the difference, as mentioned, is that biddable tends to have some variability in pricing that's beyond us, it's a marketplace. We know things that happen on those channels could move the pricing one way or another, and we monitor it on a minute-by-minute basis to make sure we make the right changes.

Okay. A couple of others that might sort of be grouped. I know Ryan Schulke is one of the founding executives, of course, involved in this, you mentioned that there were several others. I'm wondering if you might say who is in that mix in this strategic process? How do you move from testing the strategies to executing them? And how is their process coordinated between the strategic team, the new executive team, and then out of their relative impacts plus or minus in certain key verticals? Or is it pretty much across the board?

Yeah. So just when we talked about the founders, Jim, in a couple of releases that we had, there are really four key ones: there was Ryan, who is Chief Strategy Officer; there was Matt Conlin, who is Chief Customer Officer; Sean Cullen is EVP of insights, who looks at the data and sees the insights across the various properties; and then Matt Koncz, who is President of the Performance Media Group. So when we talk about them being involved in the business, it's really around them connecting that strategy to the execution. So they were hands-on, they were detailed into the mix and looking at the numbers along with our teams to make sure that we're interpreting it the right way, making the right moves to support that. Thus, you can imagine, the industry is rapidly developing and has lots of changes to it. Having that experience in the mix, that has over 10 years of seeing how the performance marketplace works really accelerates our learning and our ability to scale or realize that new traffic sources that we can and move on to the next one.

Okay. And then coordinating what they are doing on a strategic front versus what you are doing on the execution front. How does that work exactly?

So, Jim, just your question is on how do we connect strategy to execution or…?

Yeah, basically. I know there are some things you're trying and trying to determine the best ways of doing things. But then, there has to be a control element. And you're not a huge company, so you're probably talking every day with each other. But I just was curious about your process.

Yeah. Obviously, what you're really pointing towards, even in my mind, is how is the team working and how effective is it, and how granular we're getting. One of the real strengths of Fluent has been our reporting in our numbers and how we look at things. So on a minute-by-minute basis, you can see how things are performing, how consumers are acting, how the media is working, and how it's connecting to the advertisers. What we've really done is just brought more experience to the current operating systems and numbers that we have. The connection has been that the senior team is that team along with me, Alex, and a couple others in terms of how we run the business on a day-to-day basis. Then the execution side, these four executives getting in with the teams on an operating basis to move those core strategic growth initiatives forward.

Okay, and it does not really change the key vertical orientation you developed in recent years?

No, we haven't. We did talk a little bit about the Winopoly call center and how we've started to connect to higher consideration, higher value transactions, with brands in insurance, financial services, and home services. It has great growth possibilities from a vertical perspective, Jim, but as in Q2, our vertical mix was as strong as it was in Q1.

Right, thank you, Don.

Thanks, Jim.

We currently have no further questions, so I'll now hand it back over to the host for any closing remarks.

Okay. Thank you everyone for joining us today for Q2 earnings call. We are committed to moving forward with our mission and appreciate all your support. Thank you.

This concludes today's call. Thank you for joining and I hope you have a lovely rest of your day. You may now disconnect your lines.